Low correlation between relative consumption and price not due to market inefficiency
The Central Bank of Luxembourg published a working paper yesterday that attempts to solve the puzzle of why the correlation between real exchange rates and relative consumption is either low or negative.
Kyriacos Lambrias, in the paper News shocks, real exchange rates and international co-movements, finds the relationship (known as the Backus-Smith puzzle) is not necessarily connected to market inefficiency and limited risk sharing. Rather, it can arise as the efficient allocation in an economy
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